fears of a Greek sovereign default lifted
markets on Friday even though not all the details on the Eurozone’s new
€130 billion bailout package have been resolved.
will probably come to some sort of agreement with official and private
creditors before its €14.5
billion bond redemption on March 20. This would postpone a disorderly
default and departure from the Eurozone, but some analysts have been arguing
exit would be the best option, both for Greece and the currency zone.
Although he thinks there is a 50 percent chance the drachma will reappear over
the next 18 months, Citi chief economist Willem Buiter argues this wouldn't be
very “dra(ch)matic” for the rest of the Eurozone. For one thing, correlations
between the cost of
insuring Greek debt and other peripheral countries have recently broken
down. This suggests that contagion may not spread.
Eurozone banks will have had plenty of time to cut their exposure. The second
round of the
ECB’s three-year loans and the recent relaxation
of collateral rules should help as well. As Greek PM Lucas Papademos lamented
recently, “many in the Eurozone don’t want us anymore”. Maybe, that’s because
Eurozone officials now believe they can contain the consequences of a Greek
are arguing that returning to the drachma would be beneficial for Greece as well
by allowing it to regain competitiveness through devaluation. An oft-given
example is Argentina’s exit from its currency board in 2002 and the strong
economic performance that followed.
in this week’s Economist, Mario Blejer and Guillermo Ortiz, former central bank
governors of Argentina and Mexico, argue that these views
vastly understate the true cost for Argentina. They note the bank run that
followed and the renegotiation of contracts, which led to massive bankruptcies.
They advise that it would be much better for Greece to remain in the Eurozone.
may not be possible even if Greece wants to stay. Bond investor PIMCO’s CEO
Mohamed El-Erian sees
strong similarities between the current mess and what was happening in
Argentina in 2001, suggesting that the country is on the same path to default
and chaos unless officials act fast.
neither the former central bank governors nor El-Erian is clear on exactly what
needs to be done for Greece to stay in the Eurozone: They talk about reforms
and institutional changes. This sounds awfully similar to Paul Krugman’s confidence
fairy, the myth that fiscal austerity will solve all of Europe’s problems
by restoring confidence.
and Ortiz acknowledge that regaining competitiveness without devaluation is
difficult. Even after falling over the last two years, Greece's real exchange
rate, based on unit labor costs, is still nearly 15 percent higher than a
decade ago. Besides, the Greek economy has already contracted 16 percent since
the beginning of the crisis, compared to Argentina's 20 percent and 29 percent
in the US during the Great Depression. Greeks simply cannot take much more.
Eurozone officials are just buying time and paving the way for an “orderly”
default and exit for Greece, and markets are just dancing
while the music is still playing.